12 May 2011
Ms Jodie Wise
Executive Assistant Accountants & Auditors
Australian Securities & Investments Commission
GPO Box 9827
SYDNEY NSW 2001
jodie.wise@asic.gov.au
Dear Ms Wise
CP 150 'Disclosing financial information other than in accordance with accounting standards'
The Group of 100 (G100) is an organization of chief financial officers from Australia's largest business enterprises with the purpose of advancing Australia's financial competitiveness.
The G100 is pleased to provide comment on the Consultation Paper (CP 150).
The G100 agrees with the basic proposition that the statutory financial reports conform with accounting standards and that these financial reports provide a baseline of information that is prepared on a consistent and comparable basis to shareholders and other users.
The G100 also acknowledges that the proposed guidance and guidelines do not prevent the disclosure of "non-conforming" information such as underlying profits. However, we are concerned that the use of the description 'non-conforming' in respect of the provision of additional information has negative connotations that the information is not as useful or valuable as that required by accounting standards.
The proposals, while seeking to clarify and influence practice place constraints on the ability of directors to communicate with shareholders and other users in a manner consistent with the way in which the business is managed and which they consider best communicates the performance of the business and circumstances of the company.
The G100 disagrees with the underlying rationale of the proposals in the CP, which seems to be that the use of underlying profit does not benefit investors. CP 150 does not consider why entities are using underlying profit. In our view, by using underlying profit, entities are seeking to communicate with shareholders and other users in a way which, in the judgement of directors, is more transparent than a profit and loss statement that does not highlight specific items, and therefore better meets the needs of users. Underlying profit can help dissect the complexity of measurement and disclosure requirements and can isolate non-recurring, unusual or large transactions, thereby assisting shareholders and other users in their analysis of the financial performance and position of the entity.
The motivation of directors is not to potentially mislead shareholders and others but rather to communicate key information about performance of the business in a readily understandable form untrammelled by the detail and volume of disclosures required in the statutory accounts. In essence, the directors are seeking to make the information in statutory financial reports more meaningful to shareholders and other users by highlighting financial impacts that may not be apparent from the statutory accounts.
For example, generally, additional disclosures made in presentations assist in user understanding as opposed to presenting different information, such as a retailer showing quarterly sales data for a year compared to the previous year where, say, Easter is in the quarter of one year but not of the other. In these circumstances, showing actual figures and Easter adjusted sales data provides a more meaningful analysis of the performance of the business for analysts and other users. The provision of underlying profit and other information, including disaggregated information, allows users, including analysts, to make judgments as to whether the specific items disclosed are useful predictors of the future performance of the company.
We propose to define 'non-conforming financial information as: financial information that is required to be prepared and presented in accordance with the accounting standards when it appears in a financial report prepared under the requirements of the Corporations Act, whether the information appears in the financial report or another document, but is presented on a basis that is not in accordance with the all relevant accounting standards.
We also propose to define 'statutory financial reporting requirements' and two types of non-conforming information being 'pro forma financial information' and 'alternative profit information': see the proposed definitions in the draft regulatory guide RG000.13-RG 000.20.
Question B2: Do you agree with the proposed definitions? If not, what alternative definitions would you propose and why?
No. The G100 does not believe that such definitions are necessary. We do not believe that it is productive to seek to define underlying profit as a means of forcing standardization and consistency in the use of the term. As a broad notion the term underlying profit should be capable of being adapted to reflect the unique circumstances of the company within the framework already established by the Corporations Law that information provided should not be false and misleading.
However, a potential shortcoming of the proposed definition is that it is based on the assumption that all transactions and events are dealt with in accounting standards and that the requirements of accounting standards are clear and unambiguous. The term 'non-conforming information' is defined very broadly and as such it may be difficult in practice to determine the extent to which other information falls within its scope. For example, a disclosure about winning a $50 million contract implies a measure of revenue and on the basis of CP 150 the guide would need to be applied to that disclosure. We believe that it is unrealistic to expect that the guidelines in CP 150 be applied to virtually every press release.
The proposals do not adequately address those cases where accounting standards require a 'non-standard' approach to disclosures. For example, AASB 8 'Operating Segments' requires disclosure of information reported to the chief operating decision maker on the same basis as information prepared and reported internally. It is incongruous under the proposals directors are required to report in this way in compliance with AASB 8 and are likely to be restricted in providing other relevant and more meaningful information which is used by management in managing the business.
We proposed that, where non-conforming financial information is disclosed in documents accompanying the financial report (eg the directors' report), market announcements, presentations to investors and briefings to analysts, guidelines should be applied to reduce the risk of the information being misleading. These include (see draft regulatory guide at RG 000.56):
Q B3-1: Do you agree that we should provide guidelines? If not, why not?
The G100 does not believe that ASIC should provide guidelines nor interfere with processes such as the issue of media releases, commentary and analyst presentations which are the responsibility of directors. There are sections of the law dealing with false and misleading conduct upon which ASIC could rely in the event of transgressions and the disclosure of potentially misleading information.
Q B3-2: Do you consider that the proposed guidelines are appropriate? If not, please suggest alternative guidelines, including your reasons.
The G100 believes that if guidance is necessary, it is best developed by industry and professional groups as has occurred with the AICD/FINSIA publication "Underlying Profit: Principles for Reporting Non-Statutory Information" and the G100/Ernst & Young publication "Reporting to Shareholders". With the issue of this type of guidance over time good practice will evolve without the need for regulatory intervention.
Q B3-3: Do you consider that the guidelines are practicable? If not, please outline any aspects of the proposed guidelines that you consider impracticable, including your reasons.
The extensive and detailed guidelines proposed in para 56, which extend the guidelines in the AICD/FINSIA document, are generally capable of being implemented. However, complying with the proposed guideline on adjusting comparative information may not be practicable. We also note that there have been significant improvements in practice since the issue of the AICD/FINSIA guidance.
We propose that it is often necessary to include non-conforming financial information in the form of pro forma financial information in transaction documents: see draft regulatory guide at RG 000.69.
Q B4: Do you agree that it is often necessary to include pro forma financial information in transaction documents? If not, please state why.
Yes. Pro-forma financial information enables the presentation of information to users to facilitate their understanding of the potential impacts of a transaction.
We propose that it is reasonable for investors and other users of transaction documents to expect financial information in these documents to be prepared in accordance with the accounting standards to the extent possible subject to assumptions necessary to presenting the pro forma financial information.
Q B5-1: Do you agree that the accounting standards should be followed in presenting financial information in transaction documents? If not, please detail when and/or which particular standards should be followed.
The G100 considers that, where relevant to the transaction, accounting standards should be, and normally are, followed in transaction documents. However, this should not preclude the presentation of supplementary information if this is considered necessary to explaining the potential impacts of the transaction.
Q B5-2: Do you agree with our approach in situations where underlying financial records are not available? If not, what alternative approach would you suggest?
Yes.
We propose that certain guidelines should be followed when including pro forma financial information in transaction documents to minimize the risk of the information being misleading: see draft regulatory guide at RG 000.77-RG.78.
Q B6-1: Do you agree that we should provide guidelines? If not, please state why.
The G100 considers that the issue of detailed guidelines of this nature is unnecessary because of the existence of the AICD/FINSIA guidelines.
Q B6-2: Do you consider that the proposed guidelines are appropriate? If not, please suggest alternative guidelines, including your reasons.
See above.
Q B6-3: Are the two reconciliation methods we have proposed appropriate? If not, please suggest alternative methods, including your reasons.
While the G100 considers that a reconciliation of, say, underlying profit and statutory profit provides important information to users we do not believe that a line-by-line reconciliation is appropriate or practicable. A reconciliation of key items/aggregates as explained in RG000.78 is more appropriate. However, we believe that the provision of additional, more detailed, information should be left to the discretion of directors.
CP 150 indicates an intention to issue guidance to be operative from 30 June 2011. The G100 is concerned that this will not provide companies with sufficient time to review and consider current practice which may include the need to restate comparative information and to revise the format of analyst's reports.
Yours sincerely
Group of 100 Inc
Peter Lewis
National President